Kiran Bedi, a key member of ‘Team Anna,’ is alleged to have inflated her travel bills.

Kiran Bedi, a key member of “Team Anna,” is alleged to have inflated her travel bills by charging event organizers the full fare on air tickets while availing of discounts she receives as a recipient of the president’s Gallantry Award. Team Anna has been championing the Jan Lokpal bill, intended to create an independent ombudsman, to investigate corruption charges against politicians and other government officials.

Advertisement

Ms. Bedi has not denied the facts. But she has strongly denied any personal gain and said that the “savings” from the difference in fares went towards funding her NGO, the India Vision Foundation, which among other things works towards women’s empowerment and children’s education. Facing heat over these allegations, Ms. Bedi announced that she will return the balance amounts immediately, and from now on would be traveling “as per invite”.

Without getting into the ethics behind Ms. Bedi’s action, at some level this sounds innocuous. But then how about the following?

A few months ago, Kapil Sibal, the telecommunications minister, questioned the Comptroller and Auditor General’s assessment of loss from the sale of 2G spectrum licenses to provide mobile telephony. The licenses sold in 2008 at 2001 prices on a first-come, first-served basis, as opposed to an open auction, are estimated to have created a loss in revenue to the exchequer of roughly $40 billion.

Mr. Sibal said there was no basis to this claim and there was no loss to the nation. The CAG got it wrong, he suggested, and the loss was “presumptive” and a “notional” loss.

What the two situations have in common is a basic misunderstanding by both Ms. Bedi and Mr. Sibal of the concept of “opportunity cost,” which is central to modern economics and something that every first year student of economics has drummed into them. To correctly understand the tradeoffs that are at the heart of economics, we need to understand the cost and benefit of any two alternatives we’re comparing.

Basically, the opportunity cost of something involves computing both the actual (accounting) and implicit (e.g., the interest forgone by not keeping the money in the bank) costs, which measure the true cost of the resources used.

In the Kiran Bedi case, she seems to be suggesting that it was fair to charge a higher fare to her hosts. Some of these hosts were presumably cash-strapped NGOs themselves, so the ethics don’t seem to go in her favor.

Leaving aside the ethics, which have been widely debated since the news came to light, does the economics support her?

No.

The economics of opportunity costs suggests that the relevant comparison is the actual cost of her airline ticket, not the hypothetical cost she imputed by charging her hosts for a full fare ticket. The latter, the full fare, is the cost they would have borne if someone else, who hadn’t won a gallantry medal, had been their guest instead. But this is a fictional scenario – her hosts presumably wanted Ms. Bedi, and not a hypothetical alternative speaker who would have cost more in terms of airfare, so the economic analysis supports the common sense intuition that she over-charged them. It’s not that different in spirit from over-invoicing as in the Commonwealth Games corruption scandal.

To put it another way, the difference between the higher fare she charged her hosts and the lower fare she actually paid, an amount of money that she pocketed and then donated back to her NGO, represents a transfer or gift, albeit unintended, from the host NGO to Ms. Bedi. But if they had wanted to give her a donation, or if she had wanted to receive one, surely she could have asked them directly, rather than making this convoluted and unconvincing argument that what she charged them was fair?

To put things in perspective, here’s a joke I’ve heard.

An individual misses the bus to work and runs behind it all the way to the office. Later, he tells his friend that on the bright side he managed to save 10 rupees. His friend retorts that had he run behind a cab he would have save 100 rupees!

What this joke reveals to us is that even if someone hasn’t heard of the concept of opportunity cost, most people intuitively understand it. That’s what gives the humor to the punch line. The person who missed the bus wasn’t going to take a cab. So walking to work instead, he saved the bus fare, the true opportunity cost of his normal transport to work, not the hypothetical opportunity cost of taking a cab, which he never would have done.

In the 2G spectrum scam, what’s the opportunity cost?

One can quibble with the CAG’s methodology, but their concept was correct. They were trying to compare the money the exchequer actually raised through the first-come, first-served mechanism, not with the fictional alternative of zero revenue, but with a sensible and realistic alternative, or “counterfactual” in economic jargon. That sensible alternative would be to use an economically efficient method to sell the spectrum, such as an open auction with all bidders welcome, which would have raised much more revenue than selling to whoever happened to knock at the door.

In other words, Mr. Sibal is correct that the loss in the 2G spectrum scam is “notional”, in the sense that it is a theoretical construct, but he is wrong if he suggests that it, therefore, is false.

Economists deal all the time with notional concepts, such as the long-run trend rate of economic growth, full employment, or the natural rate of inflation, which have great economic significance, even if they aren’t observable to the naked eye. And opportunity cost is one of those concepts.

About India Real Time

India Real Time offers analysis and insights into the broad range of developments in business, markets, the economy, politics, culture, sports, and entertainment that take place every single day in the world’s largest democracy. Regular posts from Wall Street Journal and Dow Jones Newswires reporters around the country provide a unique take on the main stories in the news, shed light on what else mattered and why, and give global readers a snapshot of what Indians have been talking about all week. You can contact the editors at indiarealtime(at)wsj(dot)com.